Self-Dealing Charged in Unraveling of Subprime Auto Lender Centrix Financial

DENVER – The reconfiguration of Centrix Financial is growing increasingly unlikely as Centrix founder Robert Sutton is being buffeted by allegations of self-dealing in the ongoing bankruptcy case surrounding the subprime auto lender. In separate suits brought in U.S. Bankruptcy Court in Denver; U.S. District Court in Newark, N.J. and in state court in New York, former Sutton partners claim the onetime subprime auto loan king siphoned millions of dollars off his 130 credit union customers and insurers in a sophisticated case of layering of risk. In one case, reinsurance giant Everest National Insurance claims Sutton promised to indemnify 20% of its losses–basically reinsuring his own insurer–through a wholly owned company, called Founders Insurance. In a civil fraud case filed in Newark, Everest, which owns an option to buy 20% of the reconfigured Centrix–now Flatiron Financial–claims Sutton secretly signed a separate deal with a Bermuda-based reinsurer that earned him almost $15 million in commissions. Sutton also controlled a hedge fund, called Centrix Funds LLP, which purchased subprime auto loans from Centrix Financial; often in competition with Centrix’s credit union customers. The Everest suit outlines at least a dozen other entities controlled by Sutton that had close financial relationships with Centrix. Everest National did not return phone calls. Sutton could not be reached. Meantime, losses on the Centrix portfolio, which has a 40% default rate, continue to grow, with Everest adding another $60 million in the first quarter to its reserves to cover its Centrix losses. In an extraordinary plea last Friday, NCUA urged Everest to continue paying millions of dollars in default protection insurance claims to credit unions while it litigates with Sutton, lest credit unions be stuck holding the defaulted loans.